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April 21, 1937

McCAUGHN, Collector of Internal Revenue

The opinion of the court was delivered by: KIRKPATRICK

KIRKPATRICK, District Judge.

This action at law, brought by a corporation taxpayer to recover additional income and excess profits taxes paid under protest, was tried to the Court, jury trial having been duly waived.

The Facts

 A written stipulation covering all the facts necessary to the determination of the case was filed and is adopted as the Court's special findings of fact. A summary may be useful.

 The taxes involved are for the year 1919. In its return for that year the plaintiff computed an income tax of $1283.07 and an excess profits tax of $487.87.

 On August 29, 1921, the plaintiff received the report of an internal revenue field agent indicating additions to both income and excess profits amounting together to $13,277.84. The basis for this report was the total disallowance of the value which the plaintiff had put upon a patent which it owned and under which it carried on a large part of its business. This resulted in increasing the income tax by disallowing annual depreciation of some $26,000, and in increasing excess profits by reducing the invested capital by $455,000.

 On September 13, 1921, the plaintiff wrote a letter to the Commissioner of Internal Revenue referring to the agent's report and saying: "Before putting the charge through, this Company is anxious to appear before you praying relief. If you will please inform us when we may appear before your Board for the purpose of showing that we are entitled to relief, you will greatly oblige. * * *"

 The next step was the Commissioner's letter of September 19, 1921, to the plaintiff notifying it that the Department claimed and would proceed to collect an additional tax of $12,846.57. Apparently the Commissioner had decided to allow some small value for the patent, though, of course, nothing like what the plaintiff desired.

 On October 21, 1921, the plaintiff sent a letter, accompanied by a brief, to the Commissioner, stating that it was presenting its reasons why the assessment of additional tax for 1919 was unjust, etc., and concluding, "wherefore the said Company prays for relief from such assessment, under the law and regulations governing these matters." The brief was entirely devoted to an argument intended to show that the patent was worth the $455,000 originally returned as its value.

 The next thing that occurred was that on August 3, 1922, the Commissioner wrote the plaintiff a letter, and a statement which began, "your application for assessment of your profits tax for the year 1919, under the provisions of Section 328 of the Revenue Act of 1918 [40 Stat. 1093], has been allowed * * *," resulting in a profits tax of $8,002.12. There was also an additional income tax disclosed of $3,214.72, making a total additional tax, income and excess profits, over the tax-payer's original computation, of $9,446. Although thus advised that the Commissioner had made a special assessment the plaintiff did not protest or raise any question about the procedure in computing the excess profits tax under Sec. 328, but filed another letter about two months later protesting only the amount of the new assessment, and sent with it another brief entirely devoted to additional arguments to show why the value claimed for the patent should be allowed.

 Then, on February 3, 1923, the plaintiff wrote a letter to the Commissioner, which it requested be considered as "formal application to your Department for relief" under Secs. 327 and 328, 40 Stat. 1093. It contains the following reservation or condition:

 "American Chemical Paint Company expressly reserves its right, if dissatisfied with the amount of the tax so assessed, to appeal to the Courts and to have the value of its patents established as though it had not applied for relief under the said Sections of the said Act. If your Department, under the law, is unable to assess the said Company's tax under the said Relief Sections, without prejudicing the right of American Chemical Paint Company to ask the Courts to determine the value of the patents as invested capital, then send bill for excess tax without reference to the said Relief Sections, when American Chemical Paint Company will pay the said tax under protest."

 Both before and after this letter there must have been conferences between the taxpayer and the Department. This appears, not from the stipulation, but from the plaintiff's statement of claim. What position the plaintiff took at those conferences or hearings does not appear.

 Later, in 1923, the plaintiff received notice and demand for the additional tax and paid it under protest. Thereafter and in due time the plaintiff filed its claim for refund, assigning ten reasons. The first three reasons complain generally of the refusal to give the patent the value which the plaintiff claimed for it. The fourth reason was, "because the Bureau of Internal Revenue determined the said additional tax of $9446.00 under the provisions of Sections 327 and 328 of the Revenue Act of 1918." The next five remaining reasons all complain that the Commissioner in proceeding under Secs. 327 and 328 failed to give the patent the value for which the plaintiff contended, and the last reason was a general one stating merely that the tax was contrary to law, etc.

 In a distinct, and much later, proceeding involving the plaintiff's 1927 income tax, the Circuit Court of Appeals for the Third Circuit, American Chemical Paint Co. v. Commissioner, 66 F.2d 381, held that the patent was worth $455,000, and sustained the plaintiff's claim for allowance for depreciation, exhaustion and amortization of the patent upon the basis of that value for that year.


 First, as to the income tax: There is no question that the taxpayer has taken all the steps necessary to obtain a review of this assessment by the Court. There is no suggestion that anything has occurred which amounts to an estoppel or divests the Court of the jurisdiction to review the Commissioner's assessment. the decision of the Circuit Court of Appeals has fixed the value of the patent and the correct amount to be allowed for depreciation. The taxpayer's income tax is therefore, in accordance with Paragraph 19 of the stipulation, fixed at $659.21.

 Second, as to the excess profits tax: The additional excess profits tax was assessed under Secs. 327 and 328. There is no dispute about that. If the Commissioner adopted the special assessment procedure "upon application by the corporation" (Sec. 327(d) then, in the absence of fraud, this Court is clearly without jurisdiction to review his findings.

 The Commissioner's action was taken as the result of a letter from the taxpayer praying for "relief from such assessment (that is an assessment made under Section 301 [40 Stat. 1088], in the ordinary way), under the law and regulations governing these matters." This the Commissioner took as an application by the corporation for special assessment under Section 328 and acted accordingly. The taxpayer was promptly advised of this and of the new assessment so made, but did not protest the method adopted or suggest that the Commissioner had misinterpreted its request for relief. Instead it merely filed a brief asking for a revision of the assessment, confining its reasons to the single question of the value of the patent. Months later it attempted to put itself in the position of being able to withdraw, in case it could not get the special assessment reduced, by filing what it called a "formal" application for relief under Section 328, coupled with a reservation of the right, if dissatisfied with the result of the special assessment, to pursue its remedies in the courts as though it had never been made. Obviously, it could not do this. Formal or informal, an application for relief had been already made which had been interpreted and acted upon as a request for relief under Sec. 328, in which interpretation the plaintiff had acquiesced.

 All this leaves very little doubt that the plaintiff intended its prayer for relief to be application for special assessment under Sec. 328, and I make the fact finding that it did. It is not a question of estoppel. The taxpayer had the right to elect a nonjusticiable method of computing its tax, but if it did so it thereby put itself beyond the assistance of the Court, of course, it being assumed that no fraud or other equitable question was involved. This is clearly the holding of all the latest cases in the Supreme Court, and particularly Williamsport Wire Rope Co. v. United States, 277 U.S. 551, 48 S. Ct. 587, 72 L. Ed. 985, and Heiner v. Diamond Alkali Co., 288 U.S. 502, 53 S. Ct. 413, 77 L. Ed. 921. The only case in which any support for a contrary view can possibly be found is the much earlier decision in United States v. Supplee-Biddle Hardware Co., 265 U.S. 189, 44 S. Ct. 546, 68 L. Ed. 970. In that case, in spite of assessment under 327 and 328, the Court apparently revised and applied the Tax under Sec. 301. The question of the jurisdiction of the Court does not appear to have been raised at any point, and, in view of the later decisions, I do not believe that Supplee-Biddle Case can be taken for authority for the plaintiff's position.

 The two methods of assessment provided by the act are mutually absolutely exclusive. If the parties elect by agreement the special assessment under 327 and 328 it becomes the taxing law applicable to their case. The plaintiff, having so elected, can not now avoid the consequences of his speculation in placing himself in the hands of the Commissioner under Secs. 327 and 328.

 Had the letter of February 3 come from the plaintiff at the beginning of this transaction, and had it been the basis of the Commissioner's special assessment, I would hesitate to say that the plaintiff had made "application" for special assessment. The Commissioner, I rather think, would have been bound to advise the plaintiff that conditional compliance was not possible under the law and could have insisted that the plaintiff apply unconditionally under penalty of refusing to take the action desired.

 That, however, was not the case. The plaintiff's letter of February 3, 1923, was very carefully worded. The plaintiff did not suggest that it was its first application for special assessment under Sec. 328 nor call it an application, generally. In view of what had passed already, the inference is not unwarranted that the plaintiff chose the word formal because it had in mind an earlier application, which it found it convenient to ignore as informal and therefore ineffective.

 Additional Finding of Fact

 The plaintiff intended its letters of September 13 and October 21, 1921, to be applications for special assessment under Secs. 327 and 328 of the Revenue Act of 1918; and the Commissioner so understood them and made the special assessment as a result of such understanding.

 Conclusions of Law

 The plaintiff's first six requests for conclusions of law are denied.

 The plaintiff's seventh and eighth requests for conclusions of law are affirmed.

 The defendant's request for the conclusion of law, that the plaintiff is not entitled to recover, is affirmed so far as it applies to the amount of additional assessment for excess profits tax. It is denied so far as it applies to the amount of additional assessment for income tax.

 Judgment may be entered for the plaintiff for $2555.51 with interest from October 23, 1932.


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